Pratip Kar: Do boards really matter?

The dictates of good corporate governance suggest they can play a significant and useful role but few companies create the conditions to let them

It is a universally acknowledged fact that successful companies are always in need of well-defined boards to manage, direct and control the conduct and operations of companies. If this statement, which at first glance reads like the opening sentence of Jane Austen’s Pride and Prejudice, is true then the answer to the question in the title of this article should be a resounding yes. It should follow that it is necessary to increase the effectiveness of the boards and for the companies to follow rigorous governance standards. In order to do this: 

 

 

The roles and responsibilities of the directors need to be clearly defined and documented, and importance must be accorded to issues like leadership development, succession planning, setting CEO objectives and so on. But for how many boards of Indian companies, especially those that are in the public sector or have family-owned majority shareholding, would this be true? 
 

CEOs and companies’ managements would need to willingly share all the information with the boards, beyond the statutory requirements and take the board’s advice. Would this hold for public sector companies, including the Navratna or the Maharatna companies? 
 

The boards should be given adequate time and information to decide key policy issues. But in how many companies are the board papers sent only a few days or a few hours before the meetings begin or even placed “on the table” on the ground that the information contained is too sensitive and susceptible to leaks? 
 

The boards have to dedicate time, effort and intellectual knowledge to provide guidance for the formulation of strategy and development of business plans. But in how many listed companies can the boards and the independent directors confidently say they have played a role in shaping strategy and that their opinions mattered? Or are the directors spending most of the time on issues such as statutory compliance, accounts, budgets and risk management? 
 

For central public sector undertakings the boards should play a central role in helping prepare the memorandums of understanding (MoUs) with the line ministries, because the MoUs can turn out to be effective instruments for strategy planning and performance monitoring. But in how many of these public sector companies are the boards taken into confidence before the MoUs are prepared? Or are the MoUs prepared in consultation with the line ministries only (or dictated by the bureaucracy of the line ministries) and reported to the boards, if at all? 
 

Just as the boards play a role in strategy planning and monitoring, their own performance needs to be evaluated so that independent directors can introspect on the effectiveness of their roles. How many boards, independent directors and family-owned majority shareholders or entrepreneurs really feel confident of standing up to a self evaluation, let alone third-party evaluation? 
 

Boards should have independent mechanisms to monitor corporate performance and tools/processes to provide early warning signs for situations that might affect performance. Have the boards of Indian companies developed such mechanisms or do they largely rely on management reports for monitoring board performance?

There are a number of companies in the private sector, listed or unlisted, and a very limited number of companies among the central public sector undertakings that will be able to say “yes we do all that and much more”. But what about the rest of the 1,413 companies, which traded on the National Stock Exchange and the 2,896 companies, which traded on the Bombay Stock Exchange at the Muharrat session with great show in the presence of Bollywood celebrities?

 

In the light of these discussions it would be good to examine the issues and the title question with reference to two recent cases — Air India and SKS Microfinance — that have been in the news.

Air India had been ailing for a long time and refusing to address the endemic issues, such as bloated staffing, non-productive wage bills and the absence of a coherent restructuring plan. Its debt grew to Rs 19,000 crore, entailing an interest outgo of over Rs 4 crore per day. It had asked the government for a bailout package of Rs 2,000 crore. In February last year, the government released the first installment of Rs 800 crore to help the airline stay afloat. In March 2010, the government strengthened the board with four independent directors with impressive track records. They were responsible for critical functions like strategic decisions, human resources, the audit committee and engineering. A five-year turnaround plan 2010-14 was prepared and reviewed by the board. The plan envisaged revenue enhancement and expenditure reduction over different phases.

Last week it was reported that the four independent directors have voiced their displeasure at some critical appointments. This was a commendable step and the independent directors had done what was expected of them. But the questions that need to be asked to Air India and the line ministry are: (a) should the board be taken into confidence before appointing key executives, especially in an ailing company? (b) can the company afford to appoint people to these positions without the line ministry’s approval? (c) if so, who is more important — the company or the line ministry? and (d) does the board matter or the line ministry?

The financial position, debt situation and human resources are three critical areas for Air India and the government needs to demonstrate its seriousness and make up its mind in what direction it, as principal shareholder, wants to take the company. To do this with sustainable effectiveness, the airline’s board must be taken into confidence and it collective wisdom given its due place. In other words, the government needs to be serious about corporate governance.

Lufthansa’s turnaround from near bankruptcy in 1991 to sound financial health by the end of the 1990s is a good example for Air India (see Business Standard July 13, 2009). It was orchestrated by Jurgen Weber who was appointed chairman in May 1991. The board and the German government jointly played key roles in the turnaround. Weber’s main strategy plank was employee commitment. He focused on financial restructuring, cutting costs and redundancy, renegotiating landing slots and route restructuring and cooperation with other airlines. But the short lesson that emerged was that the inflow of resources is a necessary but not sufficient condition for transformational change in an organisation. Strong corporate governance has to underpin all these efforts.

The other case that demonstrates weaknesses in corporate governance systems and the inability of the board to play a critical role is the case of SKS Microfinance, where the unceremonious sacking of its CEO resulted in a controversy. It also demonstrated how a private entrepreneur, even in a listed company, could significantly influence the board. Here was a micro-finance company growing at a fast and furious pace of at least 200 per cent with the support of high-profile names developing a high-cost, high-reward business model without the board strategically advising the company on the risks associated with such growth. Such advice is also part of good governance. Good governance makes for a risk-intelligent company and for long-term sustainable business growth. When will companies realise that good governance makes good business sense?

The views expressed are personal

The author is a former executive director of the Securities and Exchange Board of India and is associated with International Finance Corporation’s Global Corporate Governance Forum and the World Bank. 
pratipkar21@gmail.com